Broader Market in an Upward Channel

Posted on August 23rd, 2012

On August 2nd and 8th we wrote about how the Nasdaq 100 would show us the way to the top and that the S&P would follow it if it went higher. That scenario is exactly what happened and now, after hitting a 4 year high, we ask ourselves, now what?

From a strictly technical perspective the S&P500 represented by the SPX has clearly formed an upward channel June when it bottomed out at 1280. See the chart below.
As the market bumped up against the top of the April highs it ran against the upper limit of this channel. There are some other studies like RSI and CCI that show in the short-term the market is overbought giving us another reason to believe there is a short-term pull-back coming.

But how far is this retracement going to go? From a technical perspective, look for it to test the bottom of the channel. Coincidentally 50-day moving average is also now in the range and may provide support ahead of the lower trend line. That could mean somewhere between 1370-1380. Which overall isn’t more than a 4% move and really doesn’t qualify as any kind of retracement or correction.

So if you’re expecting global events like European pressure or an Israel-Iran war to send the market tumbling look for the bottom to be somewhere around 1280, which is where this channel began in the first place.

Of course there is always an upward movement possibility, but as Goldman put out in their note this week that due to the election we may see the SPX press up to 1475, but from a technical perspective there’s not a lot of evidence that we go higher without a little break.

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